On September 13, Treasury proposed new regulations relating to taxpayers’ rights to access the IRS Independent Office of Appeals (“Appeals”). Appeals was designed to resolve disputes with the IRS in a fair and impartial manner. Taxpayers secured the right to take certain disputes to Appeals following the Taxpayer First Act of 2019. However, the proposed regulations seek to limit when taxpayers can go to Appeals, and the types of issues that can be raised.

The proposed regulations identify 24 types of issues that will not trigger Appeals rights. The most notable issues include regulatory validity challenges, challenges to IRS notices or revenue procedures, and certain tax treaty questions. In addition to issuing proposed regulations, the IRS has also already updated the Internal Revenue Manual to reflect the limitation on Appeals’ jurisdiction to determine issues based solely on validity challenges to regulations or IRS notices or revenue procedures.

Challenges to Treasury Regulations.  The proposed regulations exclude from Appeals’ jurisdiction most challenges to Treasury Regulations. In the last few years, the IRS and courts have seen dozens of regulations challenged, either under the Administrative Procedure Act for procedural defects, or under “Chevron” for substantive issues. Some of the challenged regulations have been on the books for decades, but the uptick is largely attributable to recent regulations that were promulgated following the Tax Cuts & Jobs Act of 2017.

The new proposed rules provide that Appeals will not entertain regulatory validity challenges unless there has been an “unreviewable decision” from a federal court invalidating the regulation in question. An “unreviewable decision” is a decision that is final and no longer appealable. This means that Appeals would not be authorized to consider a recent Colorado federal court decision—ruling that the section 245A temporary regulations regarding the dividends-received-deduction is invalid—because other issues in that case remain pending.[1]

Challenges to IRS Notices and Rev. Procs.  Similarly, the proposed regulations would prohibit Appeals from considering challenges to IRS notices and revenue procedures. Taxpayers have recently been targeting “listing notices,” which are notices that require taxpayers to report their participation in certain transactions. These notices create potential penalty exposure under sections 6707A and 6662A, among others. In March, a federal appeals court struck down one of these listing notices.[2] Other notices will be the subject of forthcoming TCJA validity challenges. Nonetheless, Appeals will lack authority to review similar issues—including challenges to that same listing notice—until the decision is final and unappealable. This may needlessly prolong disputes that could otherwise be settled quickly.

Certain Treaty Issues.  The proposed regulations provide that Appeals will lack authority to consider issues that have been delegated to other IRS units. For example, Appeals will not consider competent authority cases under tax treaties that are within the jurisdiction of the Large Business & International Division’s Advance Pricing and Mutual Agreement Program.

Takeaways.  Although most taxpayers will continue to be eligible to take cases to Appeals, the proposed regulations limit Appeals’ jurisdiction over certain issues. In practice, this is simply formalizing what we have experienced with Appeals on validity challenges in particular for a while now. If a taxpayer intends to challenge a regulation, notice, or revenue procedure in Appeals, the taxpayer should consider whether a federal court has already reviewed the issue and whether the court’s decision is final and unreviewable. If a taxpayer has additional arguments as to why the proposed adjustment is not appropriate, Appeals still has jurisdiction to address those other arguments.

[1] Liberty Global, Inc. v. United States, No. 1:20-cv-03501-RBJ (D. Colo. Apr. 4, 2022).

[2] Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022).